Big decisions on tax and expenditure

The budget will be a test of Finance Minister Pascal Donohoe, who now has complete control as a result of the two portfolios of finance and public expenditure being brought under his remit.

A significant portion of the so-called fiscal space has already been conceded by the agreement on public sector pay, leaving less room for other priorities. The water crisis in Drogheda highlights the fact that even if water charges are gone we have to pay if we want water. If we want to build a better country, money has to be found, and spent prudently.

Two key areas of philosophical disagreement dominate the pre-budget debate. The first is whether higher taxation actually leads to higher tax receipts?

The second is where do we spend money and when do we time that expenditure?

On the former, the general belief that higher taxes leads to better services was most memorably challenged by Charlie McCreevy, who cut capital gains tax (CGT) from 40% to 20% and actually increased revenue under this heading. He had the wind at his back insofar as he did it at a time when capital gains were being realised against a backdrop of asset price inflation.

However, the current CGT rate of 33% is a lot higher and the question must be posed: Is it not time to revisit the efficacy of this rate? There is no doubt that there is some tax foregone if capital gains taxes are too high because there is considerable discretion on whether to realise a gain, in the case of people making decisions about buying and selling investment assets. For example, the question should be asked as to whether underutilised assets such as urban development land or unoccupied houses might be more readily sold if the CGT rate was not so high?

Moreover, the question must be asked is to what extent high taxation and technical changes to tax have contributed to the housing crisis. Apart from high CGT deterring people from selling underutilised property, there is also a need to focus on why people might not renovate unoccupied property. Presumably not having the resources is the main one. But when you look at how small-scale landlords are taxed and the extent to which regulation is putting increasing demands on standards, a reasonable question might be — why bother renovating and renting?

Extra income from rental is often likely to be taxed at over 50%. Where a person owns an unused property, and can’t fund renovation, ideally he/she would sell it to someone who can. But the vendor is hit with the 33% tax and the buyer is not even allowed a full offset against the interest on the purchase as an austerity budget reduced the tax rebate to 75% of the interest and of course, the actual capital cost of the purchase is not allowed. In Germany, investors are allowed full interest write-off and 2% annual depreciation on the actual value of the building, less site value.

According to the latest census, there are some 198,000 empty houses in Ireland. Surely it would be preferable to have more of these providing homes for people in emergency accommodation. Moreover, surely it is better to have a more pragmatic tax system that takes lower rates if it incentivises development.

On the expenditure side, there is huge debate about where to spend tax receipts. The difficulty is a lot of extra revenue will get swallowed up by increased public sector pay rates and demands for social welfare increases. Some of this will be offset by declining numbers on the dole, but at a briefing to interested groups including ICSA, Minister for Social Protection Regina Dohery said falling dole numbers were being outpaced by rising numbers of retired people entitled to pension payments. Thus, the room for capital investment is constrained. Some economists say now is the wrong time to undertake big State building projects. They argue that this will further overheat a booming economy and that counter-cyclical economics suggests this expenditure should be deferred until the next recession.

What is missing here is a look at where the boom is happening. Dublin is over-heating. A Dublin-centric media might argue that this justifies the Dublin North metro project. However, only 35,000 of the 198,000 unoccupied houses in Ireland are in Dublin. The vast majority are outside Dublin and many are in rural Ireland.

Thus, planning should focus on solving the regional imbalance. The Cork-Limerick motorway must be top priority; the current road compares poorly with the Donegal to Letterkenny road, for example.

Proper connectivity of Cork, Limerick, and Galway is an essential pre-requisite to re-energising Shannon and Cork airports. It is farcical that, 15 years ago, there were direct flights from Shannon to Brussels; now there are none. The south and west should not depend on Dublin for access to key European cities; as long as this goes on, job creation — even in sectors like tourism — will be skewed totally in favour of Dublin.

Meanwhile, the budget should look at reducing the bureaucracy for small employers in taking people off the dole. Farmers are crying out for help and we need innovative policies to help employ people in expanding dairy farms in particular. However, the ever-increasing complexity around PRSI, USC, and PAYE taxes would certainly not encourage those who can create jobs from even thinking about it.